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Synopsys Plunges 13% in 6 Months: How to Play the Stock?
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Synopsys (SNPS - Free Report) shares have plunged 12.7% in the past six months, underperforming the Zacks Computer - Software industry, Zacks Computer and Technology sector and broader S&P 500’s return of 10%, 8.6% and 12.4%, respectively.
While the stock’s decline is significant, holding onto Synopsys remains the most prudent strategy for investors, particularly given its strong foundation and strategic positioning in high-growth markets. Here’s why.
Synopsys Price Performance Chart
Image Source: Zacks Investment Research
Soft Recovery in Synopsys’ Key Markets
Synopsys’ underperformance can be attributed to several factors. One of the main concerns has been the sluggish recovery in markets like mobile, PC and automotive, which are vital for Synopsys’ customer base. These segments are experiencing slower-than-expected growth as consumer demand remains muted amid economic uncertainties. Specifically, the mobile and PC markets are recovering at a slower pace due to global supply chain disruptions and inflationary pressures affecting consumer spending power.
In fiscal 2024, Synopsys noted that its Design Automation segment saw a 12% year-over-year increase in revenues, driven by robust demand for EDA software and hardware. However, this growth was partially offset by weaker demand in the consumer electronics space, underscoring the challenges in these sectors. The automotive market, while contributing positively with a 24% revenue growth in the Design IP segment, is also vulnerable to macroeconomic slowdowns and regulatory changes affecting vehicle production and sales.
China and Competition: Key Risks for Synopsys
Synopsys’ significant exposure to China presents both opportunities and risks. While China remains a critical market for semiconductor companies, regulatory challenges and trade tensions between the United States and China continue to weigh on investor sentiment. The recent escalation in these tensions, particularly around semiconductor exports, adds a layer of uncertainty for Synopsys. The company generates substantial revenues from Chinese customers, and any disruption could impact its growth trajectory.
Moreover, competition from other EDA vendors like Cadence Design Systems and Mentor Graphics, now part of Siemens, is intensifying. These competitors focus on different phases of the IC design process, providing a range of specialized tools and services. Synopsys’ reliance on high-margin Design IP and less profitable NAND products, compounded by the ongoing competition, makes it vulnerable to pricing pressures and margin dilution.
Synopsys’ Premium Valuation: A Double-Edged Sword
Synopsys currently trades at a forward 12-month price-to-sales (P/S) multiple of 11.32x, significantly above the industry average of 8.26x. While this premium highlights the company’s leadership and growth prospects, it also raises concerns about limited near-term upside, especially in a volatile market environment.
However, despite these challenges, not everything is gloom and doom for the company.
Image Source: Zacks Investment Research
Synopsys’ Strategic Partnerships Provide Stability
Despite the headwinds, Synopsys continues to benefit from its strong strategic partnerships and technological leadership. Its collaboration with industry giants like Taiwan Semiconductor Manufacturing (TSM - Free Report) , NVIDIA (NVDA - Free Report) , Intel and Arm Holdings (ARM - Free Report) has enabled Synopsys to maintain its position at the forefront of chip design innovation. These partnerships are not just about technology sharing, they allow Synopsys to co-develop solutions that are critical to advancing AI, high-performance computing (HPC) and next-generation semiconductor designs.
For instance, Synopsys and Taiwan Semiconductor Manufacturing’s joint efforts on Multi-Die test chip tape-outs are instrumental in driving efficiencies and reducing time-to-market for complex semiconductor designs. NVIDIA has been using Synopsys software for GPU design. Synopsys and Arm collaborated to roll out integrated solutions for next-generation chiplets, SoCs and systems in AI, HPC, automotive, mobile and IoT sectors.
Additionally, Synopsys continues to expand its technological leadership through strategic initiatives and acquisitions. The company's investment in AI-powered design automation tools has strengthened its portfolio, catering to industries undergoing rapid transformation.
Additionally, the acquisition of Ansys’ simulation solutions, expected to close in early fiscal 2025, aligns with Synopsys’ strategy of offering comprehensive solutions for chipmakers. This move enhances its competitive edge and positions the company to capitalize on the growing complexity of chip development.
Synopsys’ strategic industry partnerships and acquisitions grant access to cutting-edge technologies, fueling innovation in advanced design solutions. This positions the company to capture new growth opportunities and drive top-line expansion. The Zacks Consensus Estimate for fiscal 2025 and 2026 depicts continued growth in top and bottom lines.
Image Source: Zacks Investment Research
Conclusion: Hold Synopsys Stock for Now
Synopsys’ 13% decline over the past six months highlights the stock’s near-term challenges, including valuation pressures and macroeconomic uncertainties. However, its strong fundamentals, robust financial performance and leadership in driving technological innovation underscore its potential for long-term success.
For existing investors, maintaining a hold position allows participation in Synopsys’ growth story while navigating short-term volatility. For new investors, waiting for a better entry point during a market pullback could offer a more attractive opportunity to invest in this industry leader.
Image: Shutterstock
Synopsys Plunges 13% in 6 Months: How to Play the Stock?
Synopsys (SNPS - Free Report) shares have plunged 12.7% in the past six months, underperforming the Zacks Computer - Software industry, Zacks Computer and Technology sector and broader S&P 500’s return of 10%, 8.6% and 12.4%, respectively.
While the stock’s decline is significant, holding onto Synopsys remains the most prudent strategy for investors, particularly given its strong foundation and strategic positioning in high-growth markets. Here’s why.
Synopsys Price Performance Chart
Image Source: Zacks Investment Research
Soft Recovery in Synopsys’ Key Markets
Synopsys’ underperformance can be attributed to several factors. One of the main concerns has been the sluggish recovery in markets like mobile, PC and automotive, which are vital for Synopsys’ customer base. These segments are experiencing slower-than-expected growth as consumer demand remains muted amid economic uncertainties. Specifically, the mobile and PC markets are recovering at a slower pace due to global supply chain disruptions and inflationary pressures affecting consumer spending power.
In fiscal 2024, Synopsys noted that its Design Automation segment saw a 12% year-over-year increase in revenues, driven by robust demand for EDA software and hardware. However, this growth was partially offset by weaker demand in the consumer electronics space, underscoring the challenges in these sectors. The automotive market, while contributing positively with a 24% revenue growth in the Design IP segment, is also vulnerable to macroeconomic slowdowns and regulatory changes affecting vehicle production and sales.
China and Competition: Key Risks for Synopsys
Synopsys’ significant exposure to China presents both opportunities and risks. While China remains a critical market for semiconductor companies, regulatory challenges and trade tensions between the United States and China continue to weigh on investor sentiment. The recent escalation in these tensions, particularly around semiconductor exports, adds a layer of uncertainty for Synopsys. The company generates substantial revenues from Chinese customers, and any disruption could impact its growth trajectory.
Moreover, competition from other EDA vendors like Cadence Design Systems and Mentor Graphics, now part of Siemens, is intensifying. These competitors focus on different phases of the IC design process, providing a range of specialized tools and services. Synopsys’ reliance on high-margin Design IP and less profitable NAND products, compounded by the ongoing competition, makes it vulnerable to pricing pressures and margin dilution.
Synopsys’ Premium Valuation: A Double-Edged Sword
Synopsys currently trades at a forward 12-month price-to-sales (P/S) multiple of 11.32x, significantly above the industry average of 8.26x. While this premium highlights the company’s leadership and growth prospects, it also raises concerns about limited near-term upside, especially in a volatile market environment.
However, despite these challenges, not everything is gloom and doom for the company.
Image Source: Zacks Investment Research
Synopsys’ Strategic Partnerships Provide Stability
Despite the headwinds, Synopsys continues to benefit from its strong strategic partnerships and technological leadership. Its collaboration with industry giants like Taiwan Semiconductor Manufacturing (TSM - Free Report) , NVIDIA (NVDA - Free Report) , Intel and Arm Holdings (ARM - Free Report) has enabled Synopsys to maintain its position at the forefront of chip design innovation. These partnerships are not just about technology sharing, they allow Synopsys to co-develop solutions that are critical to advancing AI, high-performance computing (HPC) and next-generation semiconductor designs.
For instance, Synopsys and Taiwan Semiconductor Manufacturing’s joint efforts on Multi-Die test chip tape-outs are instrumental in driving efficiencies and reducing time-to-market for complex semiconductor designs. NVIDIA has been using Synopsys software for GPU design. Synopsys and Arm collaborated to roll out integrated solutions for next-generation chiplets, SoCs and systems in AI, HPC, automotive, mobile and IoT sectors.
Additionally, Synopsys continues to expand its technological leadership through strategic initiatives and acquisitions. The company's investment in AI-powered design automation tools has strengthened its portfolio, catering to industries undergoing rapid transformation.
Additionally, the acquisition of Ansys’ simulation solutions, expected to close in early fiscal 2025, aligns with Synopsys’ strategy of offering comprehensive solutions for chipmakers. This move enhances its competitive edge and positions the company to capitalize on the growing complexity of chip development.
Synopsys’ strategic industry partnerships and acquisitions grant access to cutting-edge technologies, fueling innovation in advanced design solutions. This positions the company to capture new growth opportunities and drive top-line expansion. The Zacks Consensus Estimate for fiscal 2025 and 2026 depicts continued growth in top and bottom lines.
Image Source: Zacks Investment Research
Conclusion: Hold Synopsys Stock for Now
Synopsys’ 13% decline over the past six months highlights the stock’s near-term challenges, including valuation pressures and macroeconomic uncertainties. However, its strong fundamentals, robust financial performance and leadership in driving technological innovation underscore its potential for long-term success.
For existing investors, maintaining a hold position allows participation in Synopsys’ growth story while navigating short-term volatility. For new investors, waiting for a better entry point during a market pullback could offer a more attractive opportunity to invest in this industry leader.
Currently, Synopsys carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.